Real World Economics: When minimum wage honesty is not the best policy

Conventional economic theory assumes that people are highly rational in many life decisions. Common sense and a growing body of formal research show this is not true, in both work and spending. Beyond this, people's reactions to the economic actions of others show the degree to which rationality is tempered by barely coherent ideas of what constitutes right or wrong behavior.

Nowhere is this more evident than some people's reactions to measures taken by businesses adjusting to the higher state minimum wage that went into effect Aug. 1. Some are taking actions that are predictable, economically rational, legal and, in my view at least, moral, and are catching no flak. Others are making only marginally different adjustments that are equally predictable, rational, legal and, again in my opinion, moral, but are catching hell from the public.

Take the much-publicized case of a Stillwater restaurant owner who, facing higher labor costs as a result of the higher minimum wage, itemized a flat 35-cent charge to every bill, regardless of the number of people served or its total amount. This was publicized on the Internet, and he got a wave of angry emails, much of it crossing into hate mail.

What if, instead, he had just boosted all the burgers by a dime, the 12-ounce sirloin by 50 cents, the garden salad by a quarter and so on, keeping his mouth shut about the adjustments and foregoing any political statement? That is probably what most of his competitors did, and no one seemed to care.

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As an economist with some experience in business, albeit not in restaurants, I see these reactions as not only predictable, but inevitable. If something raises the price of any input for a business, whether a virus raises the cost of pork, or a law raises the cost of labor, or more expensive insurance rates raise overhead, the business owner has few choices. She can raise prices. Or she can attempt to make her products more cheaply, by using less of the input that increased in price or by cutting staff.

The econ textbook solution is that she use a smaller quantity of the input that increased in price and charge a higher price for the product. The degree to which she can raise price is limited by how much competition she faces. However, even in very competitive sectors, if every business faces the same price increase, whether for labor, pork loins or natural gas, the average market price of products inevitably will rise over time even if individual operators feel constrained by competition.

I think the societal benefits of a minimum wage increase of the magnitude adopted here outweigh the costs.

But it should have been clear to everyone from the start that consumers would bear most of the cost and that employers would try to take whatever compensating measures they could.

That general understanding evidently did not hold. And so a cafe owner whose error was to be transparent about raising prices gets flagellated nationally while other businesses that raised prices discreetly go unnoticed.

Another local company made a similar error of honesty.

The Blue Plate Restaurant Co., which runs several metro-area restaurants, recently told its servers that it was going to start deducting credit card fees from tips charged to credit cards.

This effectively cuts those servers' compensation.

And the company explicitly tied the charges to the fact that servers and others will be getting an additional 75 cents an hour before tips.

The employer also cited higher health insurance costs.

Their intent in explaining this apparently was to mollify tipped workers.

But the effect was to outrage some of them plus many in the general public once their move was publicized.

Once again, had the company kept its mouth shut and introduced the change a few months later without mentioning the minimum wage increase, employees might have been angered, but there would have been no public outcry.

Like wages, the credit card fees are a cost of doing business, and any restaurant that decides to not accept credit cards does so at its peril.

Making servers eat the portion of these fees applied to their tips strikes some people as unfair and a few as a high moral injustice.

But it is been a practice by some restaurants for years now and is increasingly common -- and specifically authorized by the state's Department of Labor and Industry in posters distributed to restaurant companies to be displayed in worker areas.

Diners who add the tip to the credit card charge, as most do, and then express outrage at the tip surcharge, are likely oblivious to the fact that some eating places sweat their wait staffs more than others.

There is a remedy both for affected servers and those who take moral offence at this measure.

Periodically there is a "leave your tip in cash" movement that flickers for a few months and then dies out.

But servers can subtly or overtly remind their customers that they will be dunned 2 percent if tipped on the card.

And concerned diners can inquire and leave cash for the server if it is an issue. The restaurant owner would feel no pain.

Like it or not, when an input like labor becomes more expensive for any reason, any manager -- whether at a restaurant or a machine shop -- will look for ways to cut back on how intensively that input is used or to offset it with higher revenues.

An effective wage cut is one way.

Tighter scheduling of workers is another, as is sending some workers home early on slow days or requiring split shifts. Merit or tenure raises can be delayed.

More generally, while over time the cost of higher minimum wages will overwhelming be passed along to consumers in the form of higher prices, in the short run each business will experience the change as a cost increase.

Businesses get hit with cost increases all the time, and they usually don't identify a specific response to each particular increase.

They assess pricing and use of inputs on an ongoing basis and make whatever adjustments they think are best in maintaining profits.

People's ideas of which of these adjustments are moral is highly subjective and quirky at best.

If pork prices go up, no one thinks it immoral to raise the price of the pulled pork sandwich. No one claims it is unfair to farmers and meatpackers if restaurants buy less pork.

As an economist, I know that the difference in cost between a single espresso and a double espresso is substantially greater than the difference in cost to the seller.

Even though I'm getting twice as much coffee, the paper cup costs the same, as does the labor of the cashier, and the cost of the extra coffee is tiny compared to the boost in price.

Should I howl at the immorality of my being gouged in this manner?

Medieval theologians would have seen sin here, at least in theory.

But such scruples are something that we have properly discarded in the modern era.